The following table gives the prices of bonds *Half the stated coupon is paid every six months
Question:
*Half the stated coupon is paid every six months
a) Calculate zero rates for maturities of 6 months, 12 months, 18 months, and 24 months.
b) What are the forward rates for the periods: 6 months to 12 months, 12 months to 18 months, 18 months to 24 months?
c) What are the 6-month, 12-month, 18-month, and 24-month par yields for bonds that provide semiannual coupon payments?
d) Estimate the price and yield of a two-year bond providing a semiannual coupon of 7% per annum.
Bond Principal (S) Time to Maturity (yrs)Annual Coupon (S)*Bond Price (S) 0.5 1.0 1.5 2.0 0.0 0.0 6.2 8.0 98 95 101 104 100 ce 100
Step by Step Answer:
a The zero rate for a maturity of six months expressed with continuous compounding is The zero rat...View the full answer
Related Video
Bond valuation is the process of determining the worth of a bond. It is based on the present value of the bond\'s future cash flows, which include coupon payments and the return of the bond\'s face value (or \"principal\") at maturity. The discount rate used in the calculation is directly tied to prevailing interest rates, and a rise in interest rates will decrease the present value of the bond and thus lower its price. Conversely, a fall in interest rates will increase the present value of the bond and raise its price. Interest rates serve as a benchmark for determining the value of a bond, as they determine the discount rate used in the bond valuation calculation. The most commonly used measure of interest rates is the yield to maturity (YTM), which represents the internal rate of return of an investment in a bond if the investor holds the bond until maturity and receives all scheduled payments. Yield to maturity is a function of the coupon rate, the current market price of the bond, the face value of the bond, and the number of years remaining until maturity. By comparing the yield to maturity of a bond to prevailing market interest rates, an investor can assess the relative value of the bond.
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